Budget may help kill off free banking

By ALAN O'SULLIVAN
Updated: 13:30 EST, 23 March 2010

Banks will end up paying higher costs if legislation forcing them to provide basic current accounts to all is announced tomorrow, which they will recoup from customers in the form of charges.

Basic banking: Providing accounts for all could break the system of free accounts

The cost of providing basic bank accounts for all has been described as 'another nail in the coffin' for free banking and likely to push the market further towards monthly fees.

Basic bank accounts are currently available to the vast majority of bank customers, but banks have the right to decline issuing an account for a number of reasons; for example, if the customer has committed fraud in the past or has recently been made bankrupt.

An announcement expected in the Budget tomorrow will make it a legal right for every individual to have a bank account.

Approximately half of the 1.75m people without bank accounts in the UK are from the poorest 20% of the population.

Although basic bank accounts do not have overdrafts and do not allow customers to run up debts, there is still a way for them to fall into the red: they can be charged for not having enough money in their account to pay direct debits and standing orders.

If these charges went unpaid, the banks would have to shoulder the cost, which they may pass on to customers through monthly account charges.

Michelle Slade from price comparison website Moneyfacts.co.uk said: 'Banks will inevitably face higher costs if this legislation is passed, with the cost recovered through standard banking customers.

'The change could be another nail in the coffin for free banking, with banks looking to regain the additional cost potentially through the introduction of monthly fees.

'Virgin Money has already stated that when it launches a current account, it will look to charge a monthly fee, albeit with the overdraft charges included within it. This may open the flood gates for other providers to follow suit.

'Already, the number of fee paying accounts has more than doubled in the last five years and this is only going to increase further.

'While the heart of this initiative is in the right place, in practical terms it may cause more expense for the majority of customers further down the line.'

Banks are expected to resist the move to expand access to bank accounts, which is likely to cost them a lot to administer in return for very little profit.

Currently the vast majority of UK banks are free for customers, ie without regular fees, banks either recoup their cost through charges elsewhere or consider them worth providing for cross promotional purposes.

In a statement, the British Bankers' Association questioned the need for new legislation. It said: 'Everybody can have a bank account if they want one, unless (and this is rare) the law says they can't. In recent years UK banks have worked with the Government to cut financial exclusion, halving the number of households without a bank account. Every month 40,000 more people open basic accounts.

'The UK is a world leader in providing its citizens with access to banking. The banks are also working with voluntary organisations and advice centres, as well as the Government task force on financial inclusion, to ensure access to banking for all.

'We look forward to seeing how any announcement in the Budget would tie in with this ongoing partnership between Government, the banks and the voluntary sector.'